Wednesday, April 02, 2008

Economic Reform! Fox To Placed In Charge Of Regulating Henhouse!

Under an ambitious Bush administration plan, the Federal Reserve would take on the unwieldy role of uber cop in charge of financial market stability. Other regulatory agencies could see their influence diminished.

The proposal won't fix the host of economic and financial problems that threatens to plunge the United States into a deep recession, but it might help guard against future troubles. It would take years and a lot of political wrangling -- in Congress, on Wall Street, in statehouses and elsewhere -- to implement all the changes envisioned...

...Rather than checking on the health of a particular organization, the Fed's focus would be on whether a firm's or industry's practices pose a danger to overall financial stability...

...At the same time, the Fed would lose daily supervision of big banks, something the Fed probably would fight to keep intact, Gramley said. Taking away that supervision is a problem because the Fed is also the lender of last resort for commercial banks, he said.

In the biggest expansion of its credit authority since the 1930s, the Fed in mid-March temporarily granted that emergency lending privilege to big investment houses. It came after the crash of the once-mighty Bear Stearns, the nation's fifth-largest investment firm, stoked fears others could be in jeopardy.

Day-to-day banking supervision would be consolidated into one agency, compared with the current five. The Office of Thrift Supervision, which oversees savings and loans, and the Commodity Futures Trading Commission, which oversees the trading of gas, oil and other commodities, would be eliminated, with their functions merged into other agencies...

Hey, remember when the Dept. of Homeland Security was formed (conservatives, take comfort, Democrats acknowledge this was a major 'our bad!' on our part, seriously bad idea), dismantling separate agencies like FEMA and immigration and others and just lumping them all together? Hey, how'd that work out? Heckuva job, Paulson!

The most succinct smackdown of this proposal comes from the NY Times' Paul Krugman-

Anyone who has worked in a large organization — or, for that matter, reads the comic strip “Dilbert” — is familiar with the “org chart” strategy. To hide their lack of any actual ideas about what to do, managers sometimes make a big show of rearranging the boxes and lines that say who reports to whom.

You now understand the principle behind the Bush administration’s new proposal for financial reform, which will be formally announced today: it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive...

...The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry. In fact, the new plan was originally conceived of as “promoting a competitive financial services sector leading the world and supporting continued economic innovation.” That’s banker-speak for getting rid of regulations that annoy big financial operators.

He continues-

To reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology — and it would also have to face up to the fact that it was wrong. And this administration never, ever, admits that it made a mistake...

...And sure enough, according to the executive summary of the new administration plan, regulation will be limited to institutions that receive explicit federal guarantees — that is, institutions that are already regulated, and have not been the source of today’s problems. As for the rest, it blithely declares that “market discipline is the most effective tool to limit systemic risk.”

The administration, then, has learned nothing from the current crisis. Yet it needs, as a political matter, to pretend to be doing something.

So the Treasury has, with great fanfare, announced — you know what’s coming — its support for a rearrangement of the boxes on the org chart. OCC, OTS, and CFTC are out; PFRA and CBRA are in. Whatever.

And concludes-

So, will the administration’s plan succeed? I’m not asking whether it will succeed in preventing future financial crises — that’s not its purpose. The question, instead, is whether it will succeed in confusing the issue sufficiently to stand in the way of real reform.

And that's the whole point. 'Reform?! Why, we already fixed everything!', they'll say with a wink and a nod. They know this debate is coming, and they wanted it on their terms. That's fine, but I hold out hopes that most Democrats won't go along for the ride.